Working against the clock
When, in November last year, the law requiring Spanish companies to externalise their pension reserves came into force, many thought that the months ahead would witness the a real take-off of the Spanish pension fund industry.
Twelve months later, and only a few weeks away from the deadline to finalise the process, some of the changes expected have still not materialised, with many companies still trying to find the best way to approach this challenge. Although some might think that waiting until the last minute is the Spanish way of doing things, the reality is different.
The process towards externalisation has been more complex than expected and employers and unions are now asking the Spanish government for more time. The regulatory body, the Dirección General de Seguros (DGS), has recently declared that the deadline will not be changed. If this is the case, the next few weeks are expected to be extremely busy for employers, unions, gestoras (asset managers) and consultants, who will have to work against the clock.
Some believe that one of the reasons why some Spanish companies have not yet completed the externalisation process lies with the regulation itself, which is very confusing and has slowed down the pace of negotiations between employers and unions.
A handful of companies, big and small, are still trying to evaluate their reserves and discussing which of these should be externalised. Those that have already found a solution to this problem are now deciding which vehicle – pension fund or insurance contract – should be used. Most seem to be opting for insurance contracts because setting up a pension fund involves having to choose a gestora, a comisión de control (board of trustees) and recruit extra staff – among many other things.
The Spanish gestoras have been watching the process with interest, but almost all think that further regulatory and cultural changes will be necessary for their business, and the industry as a whole, to grow.
“I believe we are moving in the right direction, but to really promote the growth of the market further steps should be taken,” says José Manuel Pomarón at Urquijo Gestión de Pensiones in Madrid. “The most important obstacle for the growth are the limitations regarding annual contributions,” he says. In 1988 the limit for an individual contributing to a complementary pension plan was Ptas750,000 (E4,200) a year, and although the figure has now gone up to Ptas1.2m (E6,600) there is still a long way to go. “It’s true that most of the people contributing for an additional pension plan in Spain will probably put less that Ptas500,000 a year into it, but since the interest regarding pensions in Spain is increasing those with higher incomes would be very happy to contribute more and I think the most sensible approach would be to remove this limitation and liberalise annual contributions,” says Pomarón. This is significant if one takes into account that the pension fund system that is growing fastest at the moment is the individual one, not the occupational one that has to be promoted by the employers.
“The message that the government is giving is that the social security will provide everyone with an income on retirement, but what they can’t guarantee at this stage is if it’s going to be enough. So people in general are becoming more concerned about these issues,” says José Manuel García de Sola, director for institutional market at Banco Santander Central Hispano, Gestión de Activos, in Madrid.
Spanish social security remains very generous and local companies have never seemed to be too interested in providing their employees with an additional pension. “The externalisation process is a positive one, but some of the big companies, such as Fenosa, Endesa or Dragados, have not completed it as yet,” he says. Once this happens there will be a new flow of assets into the market which at this stage is difficult to quantify.
What is really worrying people in the industry is what is going to happen next. Companies that have never had pension reserves for their employees, and consequently are not affected by the new law, don’t seem to be planning to create new pension plans from scratch. Some believe that the growth of the market will then stop and only individual plans will gain more participants.
However, even though the size of the market has been growing, it seems that there will not be significant changes in gestoras’ market-share. The big ones still control the majority of the assets and this is not likely to change for the time being, meaning few opportunites for smaller or new players to increase their presence. According to figures from Inverco, the Spanish association for institutions of collective investment and pension funds, the two largest Spanish financial institutions, Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (BSCH), manage through their gestoras almost half of Spanish pension fund assets. At the end of June, BBVA had a market share of 24.5%, amounting to more than E8bn. BSCH, with almost 14% of the assets and almost E5bn under management, is in second position, followed by Fonditel with some E4bn assets representing around 12% of the market.
Competition is tough in this extremely concentrated market. Spanish gestoras are being very aggressive in terms of fees, offering asset management services almost for free. Since all the big gestoras are linked to the big financial institutions, pension funds are sometimes used as a means of gaining clients for their banking divisions.
“The competition among gestoras is so tough that some of them opt for not charging their clients for their asset management services for several years in exchange for increasing their banking client base,” says Ernesto Sanz, deputy director of Vida y Pensiones at Caser in Madrid. Caser, which manages the pension fund assets of the employees and clients of the Spanish cajas de ahorros, appears fourth in the ranking of gestoras with almost 7% market share representing more than E2bn .
This situation makes it very difficult for foreign houses to break into the Spanish market. Few foreign name appear among the top gestoras in the country. Jose Vicente Martín, executive director and head of global institutional services in for Deutsche Bank SA Española in Madrid, agrees. “We are a Spanish bank with foreign capital and we’ve got a distribution network already in place,” he says. With E230m under management, Martín believes that its presence in the institutional arena is good taking into account its size.
Those without a distribution network that believe in the opportunities the Spanish market could bring are trying to reach agreements with Spanish gestoras to manage a portion of their institutional portfolios. This is the strategy followed by Invesco, which from its Madrid office is targeting gestoras in need of diversification in foreign investments. “The Spanish gestoras have very well established distribution networks and foreign players can’t compete on that,” says Juan Marín, general manager at Invesco. Foreign managers can offer Spanish gestoras looking for diversification specialist management services in specific asset classes, at a time when greater sophistication is taking over the market. “We believe our experience and track record in other countries can be attractive in the Spanish market,” Marín says.
According to a study by consultants William M Mercer in Madrid, since the introduction of the European single currency, the investment strategies used by Spanish pension funds have changed significantly (see table). Fixed income investment has fallen by 10.4% since the end of 1998 and exposure to equities in institutional portfolios is now around 35%. The findings of this study highlight that, as gestoras and investors have become more familiar with Euroland, the exposure to euro stocks has come to represent more than 25% of investments.
The study, based on the investment policies of 60 pension funds, shows that although the time when institutional portfolios were purely invested in Spanish bonds is past, the Spanish market has not yet achieved the level of maturity and sophistication present in other European countries.
“The comisiónes de control know that, especially after last year’s low interest rates, those plans that have invested purely in fixed income have had very bad results, and there is a tendency towards switching to equities,” says BSCH’s García de Sola. “In general, pension funds in Spain are still very conservative, but this is changing.”
As well as foreign managers trying to break into the Spanish market, locals are going more and more external. “The foreign houses are entering our market and we are also expanding our services abroad,” says Javier Gutiérrez, manager at BBVA Pensiones in Madrid. BBVA – along with BSCH, the other global Spanish institution – may not be able to compete in Europe offering European equity management services, but it can, for instance, provide a knowledge of Latin American equity investment that could be highly attractive to European investors.
If this is what the big players are doing one might wonder if there is something left for the smaller local houses.
Banco Pastor, with pension fund assets under management of less than E150m, believes that size matters when investing. “In terms of asset management , size makes things easier,” says Beatriz Martínez, fixed income asset manager at Banco Pastor in Madrid. “The way we manage pension fund assets here is different from the way they do at the large gestoras,” he says. “ We treat pension fund assets as if they were investment funds but we give them a long-term horizon,” Martínez says. “Especially when talking about fixed income investments working with small amounts makes everything more difficult.” Martínez believes that the pension fund industry is set to grow but there is a need for more information and knowledge for the participants. “It’s still very difficult for people to understand that pension fund investments also have risks. When you talk about investment funds people can more or less understand that they can actually lose some money but when talking about pensions they don’t want to hear about bad returns,” she says.
According to Mercers’ figures, the performance of Spanish pension funds during the first six months of the year was not very good, reaching an accumulated return of 1.5%. Although the returns during the first quarter were 2.6%, the behaviour of the financial markets during the second quarter gave returns of –1.7%.
The next few weeks will be crucial for Spanish companies going through the externalisation process, since the government does no seem to be planning to extend the December deadline. However, some believe that something will happen at the last minute. “If the main characters in this story, unions and employers are asking for a bit more time, I think that at the end the government is going to give it to them,” says Santiago Férnandez, managing director at Fonditel, the gestora for the telecommunications group Telefonica (see page 27) in Madrid. “So far there hasn’t been an official statement from the government but they will say something in the next few weeks,” he says.
The question now is what is going to happen next. “Once the externalisation is finished the growth we’ve been experiencing will stop,” says Fernández. “Since the Spanish legislation on pension plans was published in 1987, almost only those companies which previously had reserves for their employees have participated in the process of creating pension plans,” he says. “You have to take into account that only around 3% of the Spanish labour force has an occupational pension plan, and I don’t see more plans being set up for some time. The government is showing some concern about the whole issue but for this to be materialised in new legislation on pensions could take two or three years.”